KUALA LUMPUR: The International Monetary Fund has projected a ‘still robust’ growth of 4.4 per cent for Malaysia this year on the back of a resilient domestic demand.
It expects credit growth to slow and monetary conditions to remain supportive.
In its regional economic outlook for Asia and Pacific, the Fund expects Malaysia to recover on a stronger footing next year when economic activities will pick up at a 4.8 per cent pace.
"Consumption growth will also be supported by a temporary cut in pension contributions, tax relief for lower-income taxpayers, and expanded federal transfers to lower-income groups," it said about this year's projections.
"Investment will decelerate somewhat, partly because of weakness in the export sector, low commodity prices, and political uncertainty."
According to the report, domestic demand has been the bright spot in the region and underpinned growth last year.
This was despite weaker investment growth in China and major commodity-related industries in Australia, Indonesia and Malaysia.
In Malaysia's case, its exposure to commodities dropped by about one third to 2.9 per cent of GDP in 2015.
Although Asean economies experienced steady growth in 2015 (averaging more than 4.5 per cent over the past two years), economic cycles within Asean continue to diverge.
The growth momentum lost some steam in Malaysia, mostly because of the terms-of trade deterioration (which had an impact on the contribution from net exports) and fiscal tightening, and decelerated slightly in Indonesia, despite robust growth in disposable income and consumption.
The direct hit from weaker Chinese imports would also be compounded by the further potential drop in some commodity prices having a further negative impact on growth prospects of commodity exporters namely Australia, Indonesia, Malaysia, and New Zealand.
The IMF also highlighted that while structural fiscal positions have remained weaker than before the global financial crisis and public debt remains relatively high in some cases notably Japan, and to a lesser extent India and Malaysia, rebuilding fiscal space should remain a priority.
"Malaysia, for instance, has reduced its budget's comprehensive strategy to address weak firms and excessive debt and eliminating implicit guarantees will also be important in this context. "
It also highlighted the need for other reforms to boost investment in the services sector.
Fiscal reforms to enhance social safety nets will be critical to reduce precautionary savings and sustain the consumption growth.
On spillovers from China, it said the trade channel has seen the exposure increasing for nearly all Asian economies.
Latest trade data showed that value added in exports embedded into final demand in China was relatively high, more than four per cent of GDP for Australia, Korea, Malaysia, Singapore, Taiwan, Thailand, and Vietnam.
Economies most adversely affected by trade spillovers are those that have been closely integrated with China through the global value chain, such as Korea, Malaysia, and Taiwan as these economies are heavily exposed to China's investment activity.
Spillovers through commodity prices from China's slowdown and rebalancing affected net commodity exporters in the region such as Australia, Indonesia, Malaysia, and New Zealand.
Spillovers through financial links impacted Korea, Singapore, and Taiwan, all which have substantial financial links with China, both directly and through Hong Kong.
Several other countries, such as Japan, Indonesia, and Malaysia, are affected by episodes of global risk aversion episodes including uncertainty about China's growth and policy outlook.
With Asia facing turbulent times, the IMF also said it is critical for the region to combat rising inequality of income and opportunities.
It recognised Malaysia as one of the countries which have placed inclusive growth as central to the national goals and explicitly in the development plans.